So you’re thinking about selling your business. You have a rough idea of what it’s worth. But you know you need to work with a professional to really understand your company’s value. That’s where a business broker comes in. 

These sales masters have the skills to assess what your blood, sweat and tears are really worth on the open market. Read on to uncover their secrets and learn how you can get the best possible valuation when you sell.

The Tricks of Their Trade: Valuation Methods Demystified

Experienced brokers rely on a combination of classic valuation approaches to measure a business’s value from every angle:

The Comp Method: What Are Similar Companies Selling For?

Brokers look for recently sold businesses like yours – your “comparables” or “comps”. They analyze the sales prices and multiples paid for these similar companies. This reveals what the current market bears for businesses in your category based on real world transactions.

Of course, no two companies are exactly alike. But the comp method offers a solid data-driven starting point to gauge value. Brokers adjust for differences in size, profit margins, growth, assets, liabilities, and potential. It provides a reality check on value.

Crunching the Numbers: The Income Approach 

This method dives deep into a business’s financial statements – past, present and future. Brokers scrutinize revenue, profits, margins, cash flow, debts, return on investment, and working capital needs going back 3-5 years. This shapes projections of future earnings potential.

Valuations hinge heavily on this approach for good reason. A company’s financial track record offers real evidence of what it can achieve going forward. The income approach provides a valuation firmly rooted in financial fundamentals.

Adding It Up: The Asset Method

Totaling up all the tangible assets a company owns – its real estate, facilities, equipment, inventory, securities etc. – generates an asset-based valuation. This method works best for asset-heavy businesses like manufacturers and retailers.  

Intangible assets like patents, software, and trademarks are also accounted for at fair market value. Add assets together, then subtract liabilities and you have a solid asset valuation. It provides a value floor based on what the company owns.

Mixing the Art and Science of Valuation

Each approach has pros and cons, so most brokers blend all three to derive a company’s worth. They weigh methods based on the specifics of each business. The experience and judgment of the broker merges art and science in the process.

Key Ingredients in the Valuation Recipe

In addition to pure finances, brokers incorporate all facets of a business to cook up the right valuation formula, including:

Size and Growth – Valuations climb higher for small/midsize businesses experiencing rapid expansion. Historical and future revenue/profit growth set the trajectory.

Financial Track Record – Fat margins, robust cash flow, disciplined spending and manageable debt all boost valuation upside. Both history and projections matter.

Management – The right leadership team with expertise and experience, supported by skilled employees, adds intangible value that buyers covet.

Assets – More and higher quality tangible assets like updated facilities, newish equipment, and liquid reserves help justify a stronger valuation.

Market Position – Winners in growing markets with high barriers to entry, limited direct competition, and loyal customers merit premium valuations.

Secret Sauce – Patented products, proprietary tech, valuable data, and trade secrets provide a competitive edge that lifts valuations.

Walking Through a Valuation from Start to Finish 

Now let’s look under the hood to see business valuations come together step-by-step:

The Background Check – Brokers thoroughly review provided tax filings, financial statements, business plans, client lists, legal docs, patents, and other materials to assess the operation. This preps them to delve in.

Getting to Know You – Brokers meet with owners, managers and team members to get color behind the numbers. Learning operations, systems, challenges, industry dynamics, and the overall business persona is invaluable.

Crunching the Books – Historical financials feed intricate broker models projecting future earnings based on growth rates, profit drivers, capital expenditures, debts, working capital needs, and cash flow.

Finding Your Comps – Brokers identify comparables based on business type, industry, size, profitability, customer base, capital structure, risk level and growth. Recent sales prices and multiples of similar companies provide perspective.

Adding It All Up – Blending comparable, income and asset analyses, brokers calculate a preliminary valuation range grounded in tangible evidence. The range may fluctuate as unknowns get clarified.  

The Final Analysis – The broker compiles all data, assumptions and methodologies into a formal valuation report outlining their objective conclusion on your company’s fair market value range.

Time to Negotiate

So you have the report in hand – now what?

Give It a Thorough Read – Make sure you understand all the valuation components, factors, methodologies and assumptions applied. Ask your broker to clarify anything that seems off base or unclear. 

Provide Missing Info – If the broker lacked key data that could sway the valuation, speak up. Offer additional details and context to refine their valuation.

Consider Your Price – Does their proposed range more or less align with your own expectation of what your company is worth? Look critically at how the methods were weighted. 

Make Your Case – If the valuation seems light, make a reasoned argument for a higher valuation backed up with facts. Highlight strengths and upside not apparent from past financials.

Be Ready to Negotiate – The initial range is usually just a starting point. Have a target range in mind, but don’t be unreasonable if the market supports a lower valuation.

Hear Them Out – If the broker surfaces concerns, weaknesses or risks you haven’t considered, hear them out objectively. Be willing to adjust your expectations if circumstances warrant it.

Take Your Time – If differences persist, give the broker time to rework their valuation and get buyer feedback. Stay engaged and negotiate in good faith. Patience and flexibility pay off.

Building Value Before the Big Day

You don’t have to sit back passively and wait for the broker’s verdict. Some proactive steps help maximize value when the time comes to sell:

Clean Up the Books – Invest in audited and bulletproof financials. It reveals a business with nothing to hide and sets you up for a better valuation. 

Give Them What They Want – Be ultra responsive to the broker’s document requests and questions. Full transparency signals high confidence in what the valuation will bear. 

Address Weak Spots – Tackle any glaring operating problems, new competitors, technology gaps, lawsuits, low employee morale or other issues weighing down your business so they don’t deflate your valuation.

Pull the Weeds – Trim inefficient units and overhead not essential to core operations. Pay off unneeded debts. Optimizing your business and balance sheet can really boost value.

Shine Your Assets – Major capital expenditures probably aren’t practical or prudent just for sale. But keeping equipment updated, real estate maximized, inventory fresh, and vehicles in good shape signals a well-run company worthy of top value to buyers.

Map the Future – With input from advisors, build out multi-year financial projections for your company assuming continued growth. Back it up with market data. This paints a picture of a promising future that supports premium valuation.

The Juice is Worth the Squeeze

Yes, selling your business is complicated. But a highly detailed valuation report from an experienced broker provides business sellers invaluable visibility on what their life’s work is truly worth. Their expertise merits the cost.

Follow the strategies here before and during the valuation process to get the maximum value you’ve earned when you go to sell your company. With patience, transparency and smart negotiating, you can make your exit a rewarding success.